FOREIGN DIRECT INVESTMENT AND ECONOMIC TRANSFORMATION IN MYANMAR Stephen Gelb, Linda Calabrese and Xiaoyang Tang March 2017 FOREIGN DIRECT INVESTMENT AND ECONOMIC TRANSFORMATION IN MYANMAR Authors This paper has been prepared by Stephen Gelb and Linda Calabrese (both ODI) and Xiaoyang Tang (Carnegie-Tsinghua Center for Global Policy, Beijing). Note: Throughout this document, we follow UN practice in referring to ‘Myanmar’ rather than ‘Burma’. Acknowledgements This paper has been prepared by ODI’s Supporting Economic Transformation programme. The authors wish to thank Dirk Willem te Velde for comments, Hamish Nixon for inputs and the DFID team in Myanmar for their exceptional support and their insightful feedback on earlier drafts. Special acknowledgement goes to James Owen (former DFID) for providing support and comments throughout the preparation of the paper. All views expressed are those of the authors alone and do not reflect DFID or ODI views. We also wish to thank the firm owners and managers, and others who provided interviews in Myanmar and in China (full list provided on page 79). We wish to thank in particular for comments UK FCO and UKTI officials in Yangon, and DFID and FCO officials in China This is a very substantially revised version of earlier drafts produced in March 2016 and May 2016. For further information about the ODI’s Supporting Economic Transformation (SET) please contact Sonia Hoque, Programme Manager ([email protected]). © SUPPORTING ECONOMIC TRANSFORMATION. The views presented in this publication are those of the author(s) and do not necessarily represent the views of DFID or ODI. ii FOREIGN DIRECT INVESTMENT AND ECONOMIC TRANSFORMATION IN MYANMAR CONTENTS Acronyms _______________________________________________________ 3 Executive summary _______________________________________________ 1 1 Introduction ____________________________________________________ 3 2 Growth, transformation, trade and investment in Myanmar: an overview _____ 6 2.1 Sectoral composition of output in Myanmar ____________________________________ 7 2.2 Employment and productivity levels __________________________________________ 8 2.3 Trade relations __________________________________________________________ 9 2.3.1 Trade diversification ________________________________________________________ 13 2.3.2 Trade in selected sectors ____________________________________________________ 15 2.4 China–Myanmar trade ___________________________________________________ 19 2.5 Foreign direct investment in Myanmar _______________________________________ 21 2.5.1 Legal and institutional framework for foreign investment ____________________________ 22 2.5.2 FDI performance in Myanmar _________________________________________________ 26 2.6 Concluding remarks on transformation, trade and FDI __________________________ 36 3 Foreign investment in Myanmar: insights from firms and sectors __________ 37 3.1 Perceptions of the operating environment in Myanmar __________________________ 51 3.2 Impact of Chinese firms on economic transformation in Myanmar _________________ 54 3.2.1 Garments _________________________________________________________________ 55 3.2.2 Tourism __________________________________________________________________ 56 3.2.3 Construction ______________________________________________________________ 57 3.2.4 Agriculture and agro-processing _______________________________________________ 57 3.3 Concluding remarks _____________________________________________________ 58 4 Towards policies for economic transformation ________________________ 59 4.1 Sector-specific policies __________________________________________________ 60 4.1.1 Garments _________________________________________________________________ 60 4.1.2 Tourism __________________________________________________________________ 65 4.1.3 Construction and infrastructure ________________________________________________ 65 5 Concluding remarks: the political economy of foreign investment and economic transformation in Myanmar _________________________________________ 68 5.1 Interest groups and economic transformation _________________________________ 68 5.2 A potential role for China in promoting economic transformation in Myanmar _________ 70 References _____________________________________________________ 73 Dataset _________________________________________________________________ 79 Interviews _______________________________________________________________ 79 Annex: Myanmar’s imports from China________________________________ 80 iii EXECUTIVE SUMMARY This study assesses the potential for foreign direct investment (FDI) to contribute to Myanmar’s economic transformation, by raising productivity and growth. The study focuses on four sectors – agriculture and agro-processing, garments, construction and tourism – selected for their significance for both transformation and FDI in Myanmar, particularly FDI from China. The paper begins with a brief review demonstrating that economic transformation over the past two decades has been limited, though data limitations make it difficult to reach firm conclusions. The sectoral composition of output has shifted, as agriculture’s contribution has dropped from over 40% in 1997 to below 30% in 2014, while industry (manufacturing, construction, mining and extractives, and utilities) doubled from around 15% of gross domestic product (GDP) to around 30%, manufacturing alone going from less than 10% to over 20%. Agriculture’s employment share is still largest, but has dropped from over 60% to 40% between 1991 and 2013, but much of the labour was absorbed by low-productivity services, and manufacturing is still very low at about 10%. The review of trade and investment looks at overall performance, as well as in the four selected sectors, and at relations with China. Exports have grown especially into China, but are dominated by extractives (particularly natural gas and precious stones). Promising growth of garment exports in the 1990s was interrupted by sanctions, but exports have begun to recover as these have been relaxed since 2012. FDI performance has similarly been poor and dominated by natural resources (extractives) and infrastructure (hydropower), with China the largest source. Garment export potential has raised manufacturing FDI since 2012. The trade and investment regimes are still undergoing liberalisation to encourage entry. Forty firms in the selected industries were interviewed, of which 31 were Chinese investors. Motivations for entry were predictable, including low-wage unskilled labour to support garment exports to European and US markets, domestic infrastructure and real estate projects in construction, and domestic market share in rice seeds and rice processing firms with rice output supplying both the domestic market and growing Chinese exports. The paper emphasises firms’ interactions with each other: Chinese garment firms’ entry is largely motivated by the choice of Myanmar as a location by their customers (often large Western retail or clothing brands), while construction and agro-processing firms have been required to have local joint venture partners, which usually have been part of the well-connected family-owned conglomerates that dominate Myanmar business. The firm interviews – and much other evidence – suggest the Chinese firms are fairly satisfied with their performance in Myanmar, and with the productivity of low-skilled Myanmar labour (adjusted for wages). The Chinese and non-Chinese firms are not very different with respect to their main concerns: the quality of infrastructure (energy and transport particularly) and trade facilitation; the quality of local employees in higher-level managerial and technical positions; the limited breadth of the financial system, including the narrow scope of financial and foreign exchange instruments; and the unpredictability or absence of regulation. The paper reviews in some detail the foreign presence in each of the four sectors and its impact on economic transformation. Significant positive effects include employment and exports in garments, local enterprise development and downstream user costs in construction (and infrastructure), and exports, technology transfer and product market competition in agriculture and agro-processing, where indirect Chinese investment (via a large EXIM Bank loan) is supporting farmer liquidity and mechanisation. The paper makes a number of policy recommendations for UK DFID, starting with general concerns. a. Support public and private policy dialogue, which is remarkably sparse, and which will help develop a culture where burden-sharing and trade-offs between different interests become visible. b. Address the severe shortage of high-level skills (entrepreneurial, management and technical) through multiple approaches: i. Set up post-secondary institutions at scale to focus on these skill areas. FOREIGN DIRECT INVESTMENT AND ECONOMIC TRANSFORMATION IN MYANMAR ii. Support ‘labour circulation’ to enable skilled and experienced employees of foreign firms in Myanmar to set up their own enterprises, via mechanisms to assist access to finance and land. iii. Use similar mechanisms to attract diaspora entrepreneurs back to Myanmar. c. Promote collective action by businesses: i. Support clustering through the regeneration and expansion of industrial parks (the special economic zones not being sufficient), focusing especially on ‘soft’ institutional infrastructure in these areas, while partnering with other donors better placed to support ‘hard’ infrastructure.